Steve Webb is the longest serving pensions minister in the history of the position and has overhauled many policies during his tenure.
And while pensions freedom and choice was George Osborne’s ‘baby’ the Liberal Democrat has been banging the drum for the freedom and choice agenda since its announcement in the 2014 Budget.
Pensions freedom, the biggest shake-up in retirement saving for decades, begins on 6 April. But Steve Webb is keen to take things a step further.
The Liberal Democrat pensions minister wants to extend the freedoms to those who have already retired – allowing people to sell their annuity contract for a cash lump sum.
Webb said while no one would be obliged to sell their regular, guaranteed income stream, it should be an option for those who want upfront capital.
“I can see no reason why this should not be an option,” he said.
Of course, pensions freedom is not the only big date on the horizon for Webb and the Department for Work and Pensions. May’s general election is looming and the battle for the ‘grey vote’ will be all-important.
MGM Advantage pensions technical director Andrew Tully said: “This seems to be idea floating in advance of the general election rather than any well thought through proposals. There would be many issues to sort out before this could be done.”
He cited potential stumbling blocks such as the income tax position of the new recipient, whether there is a tax charge when the annuity is sold and the mechanics of an annuity provider being told about a member’s death.
Tully also said the market is unlikely to be used by individuals, meaning companies would take on a number of second-hand annuities so they could pool risk, just like a normal annuity sale.
“The costs of underwriting the customer, the margin for the company putting up the capital as well as any potential tax charge, is all likely to impact on the amounts paid to the customer,” he said.
Old Mutual Wealth retirement planning expert Adrian Walker said the option would be appropriate for “very few people” and he expected any potential market to be very small.
“This will be a market where the buyers will have all the knowledge and the sellers none. This makes it appealing to buyers and it is unlikely that sellers in normal circumstances will get a good deal.
“However, a good deal is in the eye of the beholder. If someone is riddled with debt, cash in the hand could be very attractive.”
It’ll never work…
Hargreaves Lansdown head of pensions research Tom McPhail said while there was overwhelming support for pensions freedom he didn’t think this idea could ever work.
“It is to the government’s credit that it is continuing to seek new ways to reinvigorate the retirement savings sector and to encourage investors to take control of their own money. We just don’t think this latest idea will ever work.
“Similar schemes using life insurance contracts in the past were labelled by the Financial Services Authority as ‘high-risk, toxic products.’
“It is also worth noting that most market participants who have the necessary skills to engage in such transactions are the same insurers, actuaries and pension companies who are all currently working flat out to deal with all the other pension changes the government has thrown at them in recent months.””
Portal Financial managing director Jamie Smith-Thompson agreed the market was already coping with tremendous change, with consumers suffering widespread confusion and uncertainty as a result.
He said: “April isn’t very far away now and, as advisers, we are gearing up to answer a host of new questions from people who want absolute clarity around what is, after all, one of the biggest financial decisions of their life.
“So why choose this moment to throw in yet another radical idea, but this time with no detail or timescale attached? It’s just going to confuse people even more and may result in some choosing an unsuitable product for their circumstances as they assume more change is definitely around the corner.”
Smith-Thompson also had concerns for the consumer: “While some people doubtless wish they could get out of their annuity and invest in an alternative, it is difficult to imagine many scenarios where the buyer is going to give them good value for money.
“In principle, what is being suggested is similar to the traded life policies market, which the Financial Conduct Authority (FCA) considers to be a very high-risk one for the buyer.”
Aegon regulatory strategy manager Kate Smith said the idea came with a long list of risks – to both consumers and the industry.
“The first and most obvious of these is the fact that a lifetime annuity is priced on the life and medical conditions of that particular customer. So if it was sold on, the new risks and medical conditions would need to be re-priced in as part of the transaction.
“This might not turn out to be attractive to either the buyer or seller. While the former annuitant would get cash in hand, they would be losing out on the certainty of a guaranteed income and risk falling back on the state.”
Smith said it was clear Webb’s assumption is that the new flat-rate state pension will be enough to live on, but that will not be the case for most people.
“Further issues include changes to legal contracts,
tax implications for both buyer and seller, clarity on how this fits with the guidance guarantee, as well as system changes providers would need to make to accommodate this approach.”
Smith also said the Treasury would benefit from increased tax revenue from the policy: “Another winner would be the Treasury, as people selling annuities will be taxed at their marginal rate when they receive the cash value of their annuity. This could unknowingly push a lot of people into a higher tax band.
“If this option becomes ‘real’, it will be absolutely imperative that people get advice so they understand the implications of what they are getting into. We’re certain the FCA would be interested in this new market to ensure any new buyer is regulated to ward off an onset of more pension scams.”
Fidelity retirement director Alan Higham said the minister’s plans were well meaning, but risked creating a disorderly market.
“The only way this could work is if the original insurer made an offer across all its policies, particularly its smaller ones, where the risk of sick people selecting against you is minimised. In fact Phoenix Group, one of the largest quoted insurers in the UK, did such an exercise recently. Given that, there seems precious little need for further government legislation.
“The minister no doubt means well and many people resent being trapped in an annuity. But raising their hopes of an exit – which almost certainly won’t happen – is not something we would advise. He would be better served to ensure the government and regulators provide adequate protection for people about to be given pension freedom in April, which they have so far failed to do.”
Advice is essential
MGM’s Tully questioned the ethics of selling annuity contracts, asking: “Is this something we should really be encouraging people to do?”
He added: “While some people may benefit, there would ideally need to be individual advice taken so as people realised the risks involved, as well as the potential benefits.”
Advice firm LEBC agreed specialist advice would be crucial. Divisional director Nick Flynn said while expanding pensions freedom to those already retired would give them the chance to opt for cash over income, advice would be “essential”.
Smith-Thompson agreed: “With an annuity, as things are, you know where you stand. It gives you a certainty of income that you can plan around. Selling this shouldn’t be taken lightly, and proper advice should be sought if it ever becomes an option. I can’t imagine that it would be an option we would advise taking very often.”